Limited Liability and Option Contracts in Models with Sequential Investments

The paper investigates a model where two parties sequentially invest in a joint project (an asset). Investments and the project value are unverifiable, and A is wealth constrained so that an initial outlay must be financed by either agent B or an external investor C, say a bank. We show that an option contract in combination with a loan arrangement facilitates first best investments and any distribution of surplus if renegotiation is infeasible. Moreover, the optimal strike price of the option is shown to differ across financing modes. If renegotiation is admitted, the first best can still be attained unless A's bargaining position is too strong. Otherwise, B financing or C financing may become strictly preferable, and a combination of multiple lenders may be optimal.Option Contracts, Corporate Finance, Sequential Investments, Double Moral Hazard

Intellectual Property Rights and North-South Trade

We study the incentive that a government in the South has to protect the intellectual property rights of Northern firms, and the consequences of the decision taken by the South for welfare in the North and for efficiency of the world equilibrium. We conduct our analysis in the context of a competition between a single Northern producer and a single Southern producer selling some good to an integrated world market. In this competition, only the Northern firm has the ability to conduct R&D in order to lower its production costs, but the Southern firm can imitate costlessly if patent protection for process innovations is not enforced by the government of the South. We find that the interests of the North and the South generally conflict in the matter of protection of intellectual property, with the South benefiting from the ability to pirate technology and the North harmed by such actions. A strong system of intellectual property rights may or may not enhance world efficiency.

Efficiency, equality and labelling: an experimental investigation of focal points in explicit bargaining

Efficiency, equality and labelling: an experimental investigation of focal points in explicit bargainin

Interlinkage, limited liability, and strategic interaction

The authors analyze the example of a landlord, a moneylender, and a tenant (the landlord having access to finance on the same terms as the money lender). It is natural to assume that the landlord has first claim on the tenant's output (as a rule, if they live in the same village, he may have some say in when the crop is harvested). The moneylender is more of an outsider, not well placed to exercise such a claim. A landless, asset-less tenant will typically not get a loan unless he has a tenancy. Without inter-linkage, the landlord is likely to move first. In the non-cooperative sequential game where the landlord is the first mover and also enjoys seniority of claims if the tenant defaults, inter-linkage is superior, even if contracts are non-linear - a result unchanged with the incorporation of moral hazard. The main result is that if a"passive"principal - one whose decisions are limited to exercising his property rights to determine his share of returns - is the first mover, allocative efficiency is impaired unless his equilibrium payoffs are uniform across states of nature. The limited liability of the tenant creates the strict superiority of inter-linkage by making uniform rents non-optimal when, with non-collusive principals, the landlord (the passive principal) is the first mover. A change in seniority of claims from the first to the second mover (the moneylender) further strengthens this result. But uniform payoffs for the first mover are not essential for allocative efficiency if he is the only principal with a continuously variable instrument of control. So, the main result is sensitive to changes in the order of play but not to changes in the priority of claims.Labor Policies,Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Health Economics&Finance,Urban Housing,Banks&Banking Reform,Health Economics&Finance,Environmental Economics&Policies,Economic Theory&Research

Riba, Share-tenancy and Agrarian Reforms

Land tenureship may take the form of self-cultivation, contractual workers, leasing and partnership. This paper focuses on the last one known as muzara`ah or share-tenancy. After clarifying what riba stands for, it reviews the misgiving about share-tenancy as a case of riba. It also argues at length in favour of share-tenancy as a legitimate mode of land tenure in Shari`ah. Finally, it also draws attention to some reforms to ameliorate the negative aspects of share-tenancy arrangements currently in vogue.

No Global Demos, No Global Democracy? A Systematization and Critique

A globalized world, some argue, needs a global democracy. But there is considerable disagreement about whether global democracy is an ideal worth pursuing. One of the main grounds for scepticism is captured by the slogan: “No global demos, no global democracy.” The fact that a key precondition of democracy—a demos—is absent at the global level, some argue, speaks against the pursuit of global democracy. The paper discusses four interpretations of the skeptical slogan—each based on a specific account of the notion of “the demos”—and concludes that none of them establishes that the global democratic ideal must be abandoned. In so doing, the paper (i) systematizes different types of objections against global democracy, thus bringing some clarity to an otherwise intricate debate and (ii) offers a robust but qualified defense of the global democratic ideal

Optimal Resolutions of Financial Distress by Contract

We study theoretically the possibility for the parties to efficiently resolve financial distress by contract as opposed to exclusively rely on state intervention. We characterize which financial contracts are optimal depending on investor protection against fraud, and how efficient is the resulting resolution of financial distress. We find that when investor protection is strong, issuing a convertible debt security to a large, secured creditor who has the exclusive right to reorganize or liquidate the firm yields the first best. Conversion of debt into equity upon default allows contracts to collateralize the whole firm to that creditor, not just certain physical assets, thereby inducing him to internalize the upside from efficient reorganization. Concentration of liquidation rights on such creditor avoids costly inter-creditor conflicts. When instead investor protection is weak, the only feasible debt structure has standard foreclosure rights, even if it induces over-liquidation. The normative implications are that lifting legal restrictions on floating charge financing, convertibles and concentration of liquidation rights, and increasing investor protection against fraud should improve the efficiency of resolutions of financial distress.Corporate Bankruptcy, Creditor Protection, Financial Contracting

Governance: Who Controls Matters

In this paper, we provide an outlook for further research on the topic of governance. We review four different approaches on the theory of the firm and discuss implications for governance, namely; nexus of contracts / agency theory, property rights / incomplete contracts, adaptation, and nexus of specific investments.governance, property rights, adaptation, nexus of contracts